Professional investors are wary of stocks, even as the S&P 500 INX moves deeper into bull market territory – a contrast with the sentiment among small investors, who have been embracing the recent rally.
The S&P Global Investment Manager Index, a monthly survey that reflects the views of about 300 U.S. institutional investors with a collective US$3.5-trillion in assets under management, shows that sophisticated professionals are risk averse and expect stocks will fall over the coming month.
The latest survey is based on data collected from June 6 to 11.
The cautious tone follows a strong stretch for U.S. blue-chip stocks amid declining inflation, an easing U.S. regional banking crisis and a successful deal in Washington to raise the U.S. debt ceiling and avert default.
The S&P 500 is up more than 25 per cent from its recent low in October, and on Wednesday rose to its highest level in more than a year.
A gain of 20 per cent or more from a bear-market low signals the start of a new bull market, but there is little evidence to suggest that passing the threshold will deliver further gains.
Historically, most bull markets have begun with a number of sectors contributing to gains. But the current rally isn’t drawing on broad support, according to Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. Most of the market’s recent gains have come from a relatively small group of tech stocks.
“The current rally may indeed be the early stages of a bull market, but this would truly be an unprecedented beginning without some signs of improving profit fundamentals, increasing liquidity or much cheaper valuations,” Mr. Suzuki said in a recent note.
S&P has noted that professional investors also remain concerned about the U.S. political environment. Stock market valuations, which have risen with share prices, offer another key drag on sentiment, because big investors no longer see bargains.
Small investors, though, have taken a far more enthusiastic approach to the recent rise in stocks.
The latest sentiment survey from the American Association of Individual Investors, which covers the week ended June 7, showed that 44.5 per cent of respondents felt bullish about the stock market’s direction over the next six months.
That’s the highest reading since November, 2021, and it’s up sharply from the previous week’s survey, when just 29.1 per cent of respondents felt bullish. At the same time, bearish sentiment among small investors has plummeted to 24.3 per cent in the most recent survey, down from 36.8 per cent in the previous week.
The fresh view on stocks suggests that recent concerns about rising interest rates and slowing economic activity have blown over. On top of this, the Federal Reserve voted to leave its key interest rate unchanged at its monetary policy meeting on Wednesday, marking its first pause after 10 consecutive rate hikes.
AAII noted that some investors view the sentiment survey as a contrarian indicator: When small investors are feeling bearish, as they were earlier this year, undervalued stocks could perform well. Conversely, when small investors are bullish, as they are now, stocks could be overvalued and due for a selloff.
Still, if the sentiment gap between small investors and professionals offers a reason for taking a skeptical view of the recent rally in stocks, there is at least one compelling reason to give the bull market some respect: Caution among the pros is easing.
According to the Risk Appetite Index, a component within S&P Global’s Investment Manager Index, risk aversion among professional investors rose from a reading of minus 34 per cent in May to minus 10 per cent in June.
Any reading below zero means that investors are feeling risk averse. Even so, the 24 percentage point improvement in just one month suggests that the recent gains in the S&P 500 may be thawing sentiment. These investors aren’t embracing the bull market, but they aren’t ignoring it either.